Private Acquisitions
Private Acquisitions
Contents
1. Auction Sales
2. Advanced Due Diligence
3. Evaluation of Bids and Forms of Considerations
4. Allocation of Risk I: Warranties & Indemnities
5. Allocation of Risk II: Disclosure & Vendor Protection
6. Reviewing and Amending a Draft Acquisition Agreement
7. Asset Sales: Legal and Commercial Issues
8. Asset Sales: Tax Issues
9. Private Equity and Management Buy-outs
10. Contractual Protections in an MBO
Exam
3 hour exam
Marked out of 100
Section 1 MCQs 15 marks
o “What’s commercially best”, “what’s appropriate” as well as “what’s
correct/what’s incorrect”
Section 2 Long forms 85 marks
o Often a quasi-drafting question - what would you change about this
drafting and why (20 marker)
Look at how many marks available for each question to give you a feel of how
much you are looking for in terms of content
1 ¾ minute per mark
ANSWER ALL QUESTIONS
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SGS1 – INTRODUCTION TO AUCTION SALES
Exam tips:
25 of the marks available in the exam are tax
Start any question in this area with whether it is an asset or share sale
Share sale
Share sales occur as a result of a buyer purchasing the issued share capital of a
company
The target company itself does not change - it continues to trade as it did prior to
completion but with a new owner
Business/Asset sale
Buyer purchases the business of a company as a going concern
Each asset needs to be transferred separately
Ownership of the company selling its assets does not change, but the business
that is being sold does change hands
Stages of an auction sale
Identification of potential bidders
Send out confidentiality agreements to identified bidders
Receipt of signed confidentiality agreements
Distribution of information memorandum and process letter to identified
bidders
Seller prepares data room
Review and analysis of indicative bids
Selection of bidders to go forward to auction process
Selected bidders are invited to conduct due diligence investigation in the data
room
Sellers lawyers prepare the first draft of the acquisition agreement
Bidders review and mark-up the acquisition agreement
Site visit by bidders
Bidders submit second round of bids
Preferred bidder is selected
Final negotiations of acquisition documentation (acquisition agreement and
disclosure letter)
Exchange and completion
Seller Advantages Seller Disadvantages
● Reach larger pool of buyers ● A limited market sector with only one or
● Competitive; maximises price two buyers makes auction inappropriate
● Sell on more favourable terms as ● External factors (e.g. regulatory,
amendments kept to a minimum competition issues) make standard form
● Run more than one negotiation at a time; agreement and standardised process
no need to commit to any one buyer until impractical/impossible for bidders
principal deal terms have been settled ● More expensive; advisers needed to
● Controlled due diligence (i.e. able to orchestrate and advise on auction
control number and scope of documents process. Drafting of additional
transaction documents and running of
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released to buyers) parallel negotiations mean higher legal
● Control of transaction timetable i.e. fees
limiting amount of time it takes to get ● Requires management time commitment
from agreement in principle to to co-ordinate negotiations and DD
completion of sale ● More difficult to maintain confidentiality
● Aids directors in showing shareholders as more parties involved
and creditors the best price has been ● Possible attempts by competitors to
achieved uncover trade secrets (sneaky bidders!)
● Failure of auction process is public with
the market questioning why the sale fell
through (“damaged goods”) (Pfizer sale
is an example!)
● Additional legal considerations (FSMA
and financial promotions)
Buyer Advantages Buyer Disadvantages
● (Very few advantages to a buyer!) ● Possibly paying a higher price
● If little or no interest then the seller may ● Other bidders mean less likely to
sell for a discounted price to dispose of successfully complete deal. More likely
quickly to waste management time and
professional costs
● Receive more limited due-diligence
information increasing transaction risk
● Lower level of contractual protections
and warranties and indemnities
● Less opportunity to build relationships
with target’s management before
transaction completes
● Greater risk to Target’s business due to
news of the sale getting out before the
auction process has concluded
Legal Considerations
FSMA 2000 and CA 2006 are potential sources of restrictions
FSMA – Implications for seller’s solicitor + seller
Auction process could involve a specified activity
s.19 FSMA1 – No person may carry on a regulated activity unless he is authorised
or exempt.
o Regulated activity = specified activity + specified investment
Arts 73-89 Part III RAO2 – Investments of a specified kind
o Art 76 RAO – Shares are a specified investment
Arts 4-65 Part II RAO – Activities of a specified kind
o Art 14 RAO – Dealing in investments
o Art 25 RAO – Arranging deals in investments
BUT, exemptions to s.19 FSMA are set out in RAO
o Art 70 – Sale of shares in a body corporate
1
Only applies to share sales, not business sales..
2
FSMA 2000 (Regulated Activities) Order 2001 (’RAO’)
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50% or more of the voting shares in a company are being sold
o Art 28 – Arranging transactions to which arranger is the party
Could apply to seller as one of the parties to the sale agreement
Seller’s solicitors could be subject to the general prohibition under s.19
o Art 53 RAO – Advising (on merits of selling securities)
o Art 25 RAO – Arranging deals in investments
Solicitor can rely on same exemptions as above, plus:
o Art 29 RAO – Arranging deals through an authorised person
FSMA - Financial Promotions
s.21 FSMA – Restriction on making financial promotions3
o Criminal offence to communicate financial promotion unless authorised
person has approved contents/exemptions apply
An information memorandum (IM) could constitute an invitation/inducement to
engage in investment activity = financial promotion
There are exemptions to the s.21 restrictions in FSMA (Financial Promotion)
Order 2005 (‘FPO’)
o Art 62 FPO – communications relate to sale of 50% or more of body
corporate
o Art 19 FPO – Distributing to ‘investment professionals’ (or other exempt
category)
o Art 49(2) FPO – High net worth Cos
Note: not relevant on an asset sale unless shares are being sold!
FSMA - Prospectus
A prospectus is required if shares are offered to the public s.85(1) FSMA
Exemptions s.86(1) FSMA
o IM sent to fewer than 150 persons or
o Is sent only to ‘qualified investors’ (e.g. banks, investment institutions etc)
Misleading statements
The IM is essentially a brochure for sale/sales pitch
s.89 Financial Services Act 2012 – It is a criminal offence for a person to do
the following (with the purpose of inducing someone to enter into an investment
agreement:
o Make a statement which he knows to be false or misleading
o Conceal dishonestly material facts
o Recklessly make a statement that is false or misleading
Smith New Court:
o Example of s.89 in operation
o It is very important that the Seller and advisors do not overstate the
level of interest in Target
o Seller’s brokers were found to have been guilty of fraudulent misrep by
informing one bidder that there was a number of other bidders interested
in buying the target at a particular price and that was not the case
o The bidder bought the shares, having relied on the misrepresentation
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Financial promotions regime is not relevant on an asset sale if no shares are being sold
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Considerations for publicly listed buyer/seller
Class tests
Transactions will be classified according to size by reference to % ratios
% Ratio tests:
o Assets: Target gross assets divided/ by listed company’s gross assets
o Profits: Target profits / listed Co profits
o Consideration: Consideration as % of aggregate market value of shares
of listed co
o Gross Capital: Target gross capital / listed co gross capital
Thresholds:
o Class 1: if any % ratio is 25% or more but less than 100%
o Class 2: If any % ratio is 5% or more but each is less than 25%
Depending on the size of the transaction, it may be necessary to:
o Issue an announcement to the relevant Regulatory Information Service
(RIS) (Class 1 & 2)
o Send an FCA-approved explanatory circular to shareholders (Class 1 only)
o Obtain shareholder approval (Class 1 only)
Disclosure and Transparency Rules
Transaction may need to be publicly disclosed if it could have a significant
effect on a company’s share price
However, delaying disclosure is permitted so as not to prejudice legitimate
interests, provided that:
o (1) The delay would not mislead the public4; and
o (2) Anyone who receives the information owes a duty of confidentiality to
the listed company; and
o (3) Listed company can ensure the confidentiality of the information (sign
NDAs)
Related party transactions
Only relevant if transaction is between a listed company (or subsidiary) and a
substantial shareholder/director
o Must follow the same steps as Class 1 transaction (above); and
o Must ensure the related party does not vote on any resolution to approve
the transaction
o Note: generally more of an issue for management buyouts
o Impacts timing!
Other issues:
Shareholder approval
Consent required by company’s articles; or
Deal will involve:
o New long-term service contracts being entered into by the directors
i.e. if longer than a fixed term of 2 years s.188 CA
o Substantial property transactions between the company and its director/
s s.190 CA5
o Impacts timing!
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But note, do not mispresent by stating no plans to sell if there are indeed plans to sell!
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Regulatory approval
FCA approval: if the target or any part of its group is FCA-regulated it is a
criminal offence for the buyer not to obtain FCA approval if at least 10% is
changing hands
Relevant regulator: e.g. oil/gas
Consent from Secretary of State: e.g. if deal involves a newspaper merger
Impacts timing!
Competition Law
Depending on size and market share of the buyer, need to consider if transaction
will be caught by EU/UK competition law provisions
o Note: Merger will NOT be considered by both EC and UK competition
authorities at the same time i.e. if one has jurisdiction, the other does not
(‘one-stop-shop principle’)
Competitive authorities can block a merger if they consider that it may have
serious anti-competitive effects
If the transaction requires merger clearance, there will be additional delays
EU Merger control
o MUST notify the commission before any applicable transaction
o The transaction must be given clearance before it can be completed
o EUMR6 applies to concentrations with an EU Dimension
o Threshold:
High threshold but applied to the whole of acquiring group
o Investigation:
Phase I: 25 working days
Must decide there is no jurisdiction, clear concentration or
open Phase II investigation
Phase II: 90 working days
o Substantive test:
Concentration will be prohibited if it significantly impedes
effective competition
UK Merger control
o If no EU Dimension, may be subject to UK merger controls
o There is no requirement to notify the CMA7 but can open an
investigation on its own initiative
o Relevant merger situation: 2 enterprises cease to be distinct8
o Threshold:
Turnover test: Target turnover in the UK exceeds £70 million
Market share test: Combined enterprises have a market share of
25% or an existing market share of 25% is enlarged
o Investigation:
Phase I: 40 working days
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s.190 CA permits a contract to be entered into conditional on shareholder approval so this may no longer present such a
significant issue with timing
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EU Merger Regulation
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Competition and Markets Authority
8
The UK merger control regime applies to business sales and share sales
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Must decide whether to clear unconditionally, clear subject
to undertakings or open Phase II investigation
Phase II: 24 weeks (can be extended by 8 weeks)9
Buyer is prohibited from acquiring further Target shares
o Test:
There is a relevant merger situation that leads to a substantial
lessening of competition10
If this comes up in the exam, ensure that you communicate that you understand
each of these issues will cause delay and therefore affect timing/timeline of the
deal!
Data protection
Preparation of information to go in the data room will likely involve confidential
employee information
This will need to be anonymised to avoid breach of the Data Protection Act 2018
and the General Data Protection Regulations (‘GDPR’)
Confidentiality Agreement
Key documents uniting private treaty sale and auction is the confidentiality
agreement
Target is NOT a party to this agreement
Confidentiality undertaking is the operative provision
Will contain a perpetuity provision
o Consider whether the length of time is commercially sensible
o What is the industry standard (e.g. 5 years)
o Is there logic behind what you are asking for i.e. is it tied to patents or
limitation period?
o Time limit of forever is unlikely to be agreed to by the bidder and, it if
goes to court, the judge may strike it out for being unreasonable
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This will blow up your sale timeline
10
See Asda and Sainsbury’s proposed merger
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SGS2 – ADVANCED DUE DILIGENCE
Data Room
When analysing a data room, think about the documents you will need to see
that may not be there
If a document in the data room refers to something, do you have that thing being
referred to?
E.g. loan agreement, guarantee, contract etc.
Look for gaps and errors in the data room, not just documents
Blackpool & Fylde AC v Blackpool BC: There is an obligation to consider all
conforming tenders if received in time
1. Employment Issues
Directors service agreement
Restrictive Covenants
o Need to be reasonable in scope + duration in order to be enforceable
Target to enter into enforceable RCs before completion (e.g. 36
months 12 months)
May require additional consideration
All service contracts across the group should also be reviewed
Buyer will insist, whilst Seller still has leverage to do this!
Handover
o Keep director/founder for short period 6 months - 1 year because of
market and business know-how
Letter varied contract
o Confirm any variation has been accepted by director (i.e. signed letter)
Tutor service contract
Data Processing11 – needs to be done in accordance with the Data Protection
Act 2018 (‘DPA’):
o The data subject needs to be informed:
(1) that their data will be processed
(2) of the purpose for which it is processed (e.g. part of DD for
sale)
o BUT seller will want to keep this confidential for commercial reasons
o To avoid breaching DPA, anonymise before putting in data room
Will then fall outside scope of DPA as not personal data
Employments Rights Act 1996 – employees are entitled to 1 weeks’ notice after
1 month, then 1 week notice for every year of service up to 12 years
o If contract gives less than statutory minimum, statutory notice applies
General point: all contracts should match fact pattern: check dates, terms, names
etc.
Freelancers
As above, in order to fall outside the scope of the DPA, the letter of appointment
for freelancers needs to be anonymised
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When there transfer of data is made by a UK entity, and includes personal data relating to an identifiable living individual, it will
be considered processing by a controller. Giving such information to bidders during DD will amount to processing.
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Shared services
Shared services such a HR/payroll will stop once Target leaves the group
o The cost of alternatives is dependent on the position of the buyer
i.e. whether they already have this function within its group + how
easily it can take on additional work
o Effect on profitability of Target will depend on how the services have
been costed out:
i.e. if charged at commercial rate won’t impact profitability
much
Buyer may want a transitional services agreement; services are provided for
short period post-completion
HMRC Investigation
If freelancers are in fact employees:
o Target has to pay unpaid income tax and NI contributions
o Employment costs generally increase going forward as there are more
employees than expected
Press HMRC for an answer
Seller should be prepared to offer an indemnity for costs associated with the
investigation
o But, resist covering increased costs going forward which may be incurred
as a result of freelancers being retained as employees
Pension scheme
s.75 Pensions Act 1995 – If it is a final salary scheme and it is in deficit, the
Target will be liable for the deficit once it leaves the group
2. Customer and IP Issues
Key Contracts
Change of control clause – allowing other party to terminate when Target’s
shares change hands
o Too early to approach now as response will be dependant on identity of
Buyer
o Buyer will not want to proceed on the basis that AA is conditional upon
receiving confirmation that clause won’t be exercised; many costs would
have been incurred by now, and other party would be in a much stronger
position to renegotiate contract terms
o Once a buyer is identified, obtain a waiver from other party, confirming
they won’t exercise the right to terminate
Non-assignment clause –will affect asset sales only
Duration of contracts – ending soon/ended?
o Ending soon - obtain more information about likelihood of contract
renewal (once a firm buyer has been identified)
o Ended - information needed as to whether new contract has been
renegotiated
If new contract signed, obtain copy
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